The financial crisis appears after 40 years of profligate spending. Let's include what matters:
http://dissidentpress.wordpress.com/2010/01/15/financial-crisis-and-the-value-crisis-lets-have-it-all-is-unfortunately-a-repited-and-natural-thing/

J. E. Vig
http://Danmark.Wordpress.com

The financial crisis appear after 40 years of profligate spending. Let's include what matters:
http://dissidentpress.wordpress.com/2010/01/15/financial-crisis-and-the-value-crisis-lets-have-it-all-is-unfortunately-a-repited-and-natural-thing/

J. E. Vig
http://Danmark.Wordpress.com

@ KO

There is so much going on here, in terms of different complex issues, that one cannot get a good handle on it.  I will only try to address your specific question: "Does injecting money really sustain output?".

-- The short answer is: NO, not in and of itself.

-- The less-short answer is:  When V (velocity of circulation of money) is falling, then an increase of M (money) is tautologically necessary to enable for a given nominal output level (prices times volume index) to be maintained.  So, the increase in money becomes a NECESSARY condition, but it is NOT a SUFFICIENT condition for real output (volume index) to be maintained.

-- The long and complete answer I cannot give, and neither can Obama, Bernanke, Summers, etc....We know that M has to be increased when V falls, in order to sustain the value of (PxT).  Parts of the required increase in M may 'originate' in actions of the monetary authority (the Fed), but other parts may originate in the markets or be 'induced' by money demand from the public. Whatever the case may be, we can not be sure that P and T separately will remain the same.  Prices could rise and volumes could fall, or alternatively (in the best case) prices could fall and volumes could rise, or any combination really between the two is theoretically possible.  The overall outcome will depend on the actions of numerous actors on numerous individual markets, and on the existing 'conditions' (in terms of unused available unemployed resources, of stock levels, etc...) .  That clearly is going to be directly influenced by existing rules, regulations, practices...in individual markets. It will also mightily be influenced by everything that effects 'confidence' in general and trust in the maintenance of 'rule of law' and responsible government. 

That is why I think that the real threat (concerning the division between P and T) does not come from Bernanke, but rather from characters like GWbush, Paulson, Nancy Pelosi, Barney Frank, Chris Dodd and...'the One' (the current Messiah) himself.  

We do not need a gold standard, nor great economists, but we do need honest and responsible politicians.  In order to get that, more than anything else, we need to maintain moral standards (of honesty and self-responsible behavior) in education, which begins in the 'home'.    

Meet "Gossamer" and his tao bum buddies.

http://www.thetaobums.com/index.php?showtopic=8018&st=0

You're absolutely right @mf,
that a basic understanding of economics will only get you so far. But reading Hazlitt's Economy in One Lesson, really is a decent start, seriously, you should give it a try.
I promise you'll feel instant relief from your uncertainty ;-)

And from there, you can always choose to get beyond basics, and venture into the works of Bastiat or Von Mises for instance. I could also have recommended the in-depth, two volume Austrian Perspective on the History of Economic Thought, but that might have been a bit too much of a good thing. Great work by Rothbard though. Of course you could check out the site of the Von Mises Institute; plenty of online resources on the business-cycle, central banking and monetary policy. Rothbard's articles on the Fed provide a good start.

Kind regs from Amsterdam,

Sag. 

@ Traveller

Let's all try to be modest and not pretend that we have a cristal ball to look into the future with any certainty.  We have some points of agreement and of disagreement.

- I agree that hyperinflation is a real possibility next year and beyond, but I also think that it is NOT likely.  Stagflation (like in the seventies and early eighties) is more likely.  The main reasons being that monetary policy can be - and will be - adjusted very quickly in response to price movements, and that current fiscal policy (at least in the US)  seems to be embarking on a rather disastrous course of massive government expansion and of debt creation.  The real cost will be relatively slow growth in output (GDP) over the next few years, and thus real income foregone compared with more normal growth rates.  One could argue that the same result of 'stagflation' would occur even if nothing were done today, because of unsustainable levels of debt creation over the past decade and longer, but the current misguided policies are likely going to make the stagflation last longer.  

-  I can asssure you that the "real economy" will still be there in 2 or 3 years.  On that we seem to disagree (because of your choice of words), but probably not really.  Many people seem to have forgotten that there are 'automatic stabilisers' that limit real output movements in either direction over business cycles.  Even Japan ended its 'lost decade' of the 1990's with a real GDP very close (slightly higher) to its level a decade earlier.  I am confident that we will collectively do better over the next decade of expected 'stagflation', i.e. moderate inflation levels combined with slow real-output growth levels. 

@  KO

1) Money is not like a regular commodity, subject to the laws of supply and demand on a single market.  Money has several functions.  As a 'unit of account', it is how we measure the prices of goods and services.  Its "value" is the basket of real goods and services that it can buy on product markets, and that does not directly depend on the interaction of money supply and money demand, although there is a complicated relationship.    

2) A good starting point is the tautology of the 'Equation of Exchange':  M X V = P X T.  This says that the nominal level of national income (Prices times transactions or output equals money supply times velocity of circulation of money).   The "lack of confidence" of which you speak means a dramatic reduction in the velocity of circulation of money (V), which requires an increase in money supply in order to sustain the same (or similar) nominal income and output level in the economy.    

3)  I do not know exactly what the Federal Reserve Bank System has been doing in recent months (and even less what other central banks have been doing), but I am pretty sure that its massive balance sheet expansion does not exactly translate in increased money supply (some monetary aggregates - M1, M2, etc...-  will have gone up more than others).  I am not endorsing what they have been doing, much of it seems to be rather technical and mainly related to the functioning of specific financial markets rather than to the overal level of liquidity in the economy. But, at the same time, I expect that they can easily manipulate monetary aggregates in either direction based on perceived need in function of what is happening on markets of real goods and services.  

4) In my opinion, the real problem today is not with monetary policy, but rather with fiscal policy.

@ Sagunto

I am not so sure, as you seem to be, that the boombust cycles in asset markets have much to do with monetary policy stricto sensu , but rather with poor financial market regulation and perverse incentives deriving from certain fiscal policies.  Housing market policies are the prime example in the US.

Perhaps after reading Hazlitt's book I might better understand what is going on today, but somehow I suspect that an understanding of "basic economics" won't be enough.  

In any case, hold on to your wits and try to convince the Dutch government to issue inflation-indexed bonds (like the Israelis and the Americans do) so that you at least can protect yourself against Traveller's coming "hyperinflation". It's either that, or getting Kappert to go to a 'mosque' and pray for divine intervention.

@KO,

You're obviously right in pointing out that central banks are meddling in matters better left to the market. Unfortunately their policies of artificially lowering interest rates and printing money out of thin air did have a substantial effect on consumption and investment: malinvestment due to the bubble created by monetary bureaucrats.
That seems to be the true nature of inflation: the familiar boom-bust cycles, bubbles of misallocated resources, overconsumption, the running up of debts, and the ultimate degradation of the currency.
Of course, when finally the cost of living goes up for Mr. and Mrs. John Q Taxpayer, the financially and politically well connected have already profited from their fake money. The price will be paid by the "less fortunate". Should worry even liberals, one would think.

The shortest and surest way to understand basic economics would probably still be: reading Henry Hazlitt's "Economics in one Lesson", one chapter a day. Expected recovery in about 3-4 weeks ;-)

Kind regs from Amsterdam,

Sag.

We need the new installment SOON!

@ Traveller

1) You surprise me (often).  Yesterday you told Takuan S that you are too busy to expound further on Eastern 'philosophies' (or was it mysticism?), and today you "cannot resist to come into the fray".  Frankly, there is not much of a "fray" here.  Ms Kayser refuses to address any of the points I nicely lined up for her.  She is not writing on economic matters, but simply assembling disparate bits and pieces of pronouncements in various media.  I don't see any message in her 'woordkramerij' beyond the silly cry of 'planetary bankruptcy'. 

2) If you will permit me, I must correct something you said.  I did NOT say that "it is a zero sum situation". Under point 4, I clearly mentioned the possibility of (a)  'structural' factors causing periods of stagnation (and thus relative poverty) in certain economies, and (b) 'cyclical' factors that continue to cause or explain the ongoing conjuncture or business cycles in various developed economies.  Macroeconomics is not a "zero sum game".  Good macroeconomic managament creates more income (and thus over time more wealth, if part of the incomes get saved and invested) than bad macroeconomic managament in any economy.   I am willing to bet with you that, barring any major world military conflict, five years from now, the total 'national' income of the world will be significantly higher than it is today, both in a nominal sense and in a 'real' sense (i.e. after inflation adjustment). Chances are that world income will be even higher this year, compared with last year, simply because the moderate decline in incomes in the 'advanced' economies will be more or less be offset by continued (but lower) real growth in China, India and other 'emerging' economies.  All this talk about world "bankruptcy" is so much b....

3)  I cannot claim to fully understand your story about speculation by banks, but I fail to see the relevancy of it.  One person (or company's) debt or liability is always by definition somebody else's claim.  So the world as a whole cannot go "bankrupt".  Individuals, banks and companies, of course can go bankrupt, as a result of 'speculation', and/or of excessive 'leveraging' activities and the like.  The sum total of these activities can significantly affect the INCOME DISTRIBUTION (as you say, there will be winners AND losers), but the impact of financial developments on the 'real' economy (where employment and income or GDP creation takes place) will be limited. 

4)  Obviously, the role of money and of central banks in the 'good' functioning of economies is a complex subject, and there is always lots of room for sensible and less sensible criticism.  But one should never confuse financial matters with 'real' matters (of employment and income creation or production).  And I am not denying that developments in the financial sector do have an impact on the real sector, but that impact is relatively small (in terms of variations in employment levels and of GDP growth rates over successive time periods). 

5) I want to stress 2 points:

-- First, I repeat, the world cannot go "bankrupt" because it has no debts vis-a-vis the rest of the planetary system.  All debt is intra-world debt.

-- Second, while there is presently a crisis underway in the financial system (a crisis which will likely ensure that the present recession will be somewhat longer and perhaps deeper than we have been accustomed to in recent decades), one should ask the question as to who is (or might be) benefiting from trumpeting doomsday scenarios.     Yes, first of all, all those who want a significant shift of resources from the private sectors to the public sectors.  Also, of course, the reference of Sharon K to a recent speech by the Managing Director of the IMF, Strauss-Kahn (a French politician who wants 'world government'), is pertinent here.  But, that is another long story.....          

@ Sharon K

1) That you have "no time" for serious commentators, that is abundantly clear.  You are like a 'chicken little' jumping on some particular media bandwagon.   

2) I could just as well state that I have "no time" for people who confuse macroeconomics with microeconomics, or who think that individual wealth is like societal wealth, or who confuse economics with personal financial management, etc..

3)  Indeed, debt is "negative wealth" for the debtor, but it is equally POSITIVE wealth for the debtholder.  Since we agree that the world's debt is not being held by some mythical Martians or Mooners or Venusdwellers, but by the world's debtholders, I fail to see how the world can go "bankrupt" because of debt between different world dwellers.

4) The fact that the world cannot go "bankrupt", does not preclude that various types of (temporary) economic crises can erupt in various countries or in regions of the world, or even in the whole world.   These crises have nothing to do with (individual) "bankrupcy".  They can be of long duration, if there are 'structural' factors that keep a particular economy from growing (in a per capita income sense) and thus mired in poverty.  Or they can be of a shorter duration if there are 'cyclical' factors that inevitably will ensure that periods of booms and of recession will continually succeed each other.  No doubt, the excessive level of debt creation in recent years is playing a major role in the current (temporary) recession in major economies in the West. 

5) Obviously, an exhaustive explanation of current economic troubles is impossible in this venue.  I suggest that you first learn to make the distinction between flows and stocks.   National income is a flow concept. It is expressed per time period, i.e. it gets recreated every time period (say every year), but its levels will fluctuate somewhat.   By contrast, national wealth is a stock concept, which means it reflects a particular position (like a a photo picture) at a particular moment in time.  For any country, that 'wealth' essentially consists of human capital+physical capital+(net financial claims on the rest-of-the world).  For some countries these 'net financial claims' will be positive, and for other countries they will be negative, but their (world) total must be ZERO.

6) Now, as to the role of 'money', compare it with the role of 'grease'  or 'oil' in a machine.  It helps the machine to function, but it certainly does not equate with the machine.  From a MACRO economic perspective, money helps in the constantly recurring process of income creation, but it is not the same as income, nor debt, nor wealth.  

7) Indeed, one cannot "print one's way to prosperity".  And I don't think that any sensible person would claim that one could.   But, neither can the world go bankrupt.  However, if people stop working, and if societies stop 'functioning' then the world will surely 'grow poorer' (i.e. create lower annual total income levels).  But it will still not be "bankrupt" (which essentially means that one cannot pay one's debt).  The world has no debt vis-a-vis the rest of the planetary system or 'creation'.

8)  Besides learning about the distinction between macro and micro economics, and about the role of money in the process of income creation, I also recommend that you learn (somewhere) about the distinction between income creation and income distribution. 

P.S. I have no silver coins, nor gold coins, stored for "at least 6 months".  But I do have some food stored for perhaps 2 weeks.  The latter has more to do with potenial disruption from terrorists or weather events than with Bernanke or Trichet  "printing money".           

@ Sharon Keyser

1) Actually, in his response Peter vdh made a lot of sense.  One may quibble about particular details, but the 'whole' of his post was not bad. 

2)  If the world has 400 trillion debt (in dollars?), who is it indebted to?  The Moon, Mars, or Venus?  No, it is the world itself that is holding this debt.  So, how could the world or planet be "bankrupt"? 

3) Money is NOT the same as debt, and I am sure that Peter vdh knows that.  I am not sure whether you know that.  This is not to deny that there has been excessive debt creation in a number of major economies in recent times, which has inevitably affected the conjuncture or business cycle, and which will affect the length of the current recessionary phase of the cycle.  But it will remain a cycle, if history is any guide.

Conclusion.

The world cannot go "bankrupt".  But the world's media will continue to create massive amounts of 'hot air'. And yet, I remain very sceptical about "global warming" (although Albert Gore now talks about "climate change" in view of the current cold winter).   

In this article we can see an astonishing ignorance about money, where it comes from and what purpose it serves. This ignorance seems wide spread. Let me try to simplify it a little. I would like Marcfrans to correct me, if I write anything wrong:

• The only things that have real value are goods and services. If we can make society produce ample goods and provide a lot of services, we are living in a prosperous society.
• Money is an instrument created for measuring the value of goods and services between them and over time. It is we, the public, that decide what the value of a certain good or service is. The availability of a good and how much we want it do determine that value. We will measure it by money. But money is nothing more than an instrument. Money isn’t a goal on itself.
• “Money” is in fact the little paper, on which is written what society owes us, due to services and goods we have provided to society. Money makes goods and services more liquid or “interchangeable” over time, place and nature.” Therefore it is important that we can trust this “paper” as being generally acceptable. As something that will not erode too much over time. Of course it is also important that society can really deliver everything they have promised us by giving that sheet of paper. That’s what central banks do. They control the total amount of money so that the currency stays reliable.
• If you look at it this way, one may ask if saving money, to counter the greying of the population makes any sense. The real question is, will we find enough young people to provide for the services needed for all this old persons? After all money is only paper. It will not nurse you. Luckily money can be used cross-borders. If we have saved enough –read: provide enough services and goods to other nations- we could later on allocate our work-recourses to taking care of elderly people and buy the rest of our needs abroad. Of course this suposes enough economically stable “other countries” that have no greying problem.

A quick note to the spirit of Joe McCarthy, pardon Ms Bachmann: pro-American or not - when asked about the Speaker of the House and Senate Majority Leader, Bachmann said "I am not going to say if they are anti-American or pro-American." A clear statement!

One minor drawback of doomsday 'prophesies' is that nutty lefties (like Kappert) actually believe all this stuff, and will surely make their own fanciful 'diagnosis'.

"If all the bank loans were paid up ..." which must remind us, that we are inventing money which no way will ever exist. Try to calculate what you are spending for waste, meaning you're it and soon after you throw it away or you never use it (i.e. plastic wraps, one-time games, etc.). Labour (quite different to work) has less and less to do with the 'money creating machine', Westerners believed in since Friedman/Schwarz and Reagenomics. As with regards on 'honest money' - as long as Silvio Gesell is unknown to Wall Street, nothing will change.

Irrational exuberance (copyright Greenspan) in booming times and doomsday wallowing in periods of economic recessions are two sides of the same coin of human nature.  This article is a (libertarian-inspired) collection of items related to doomsday wallowing.  It induced a headache in this reader.

Since the article does not convey any clear message, beyond 'doomsday' or "planetary bankruptcy", one does not know how to tackle its main theme.  While some of the presented individual items or claims have some merit, many do not. Let's take two easy ones.

--  China is certainly NOT using the remedy of "yuan devaluation".  In fact, the Chinese authorities have been allowing the yuan to APPRECIATE modestly in recent years, but insufficiantly so in view of exchange market pressures reflecting China's large balance-of-payments surplusses.  

-- It is disingenuous to claim that world trade has "collapsed" on the basis of an IMF report that is actually predicting modest growth (of between 2 to 3 %) in world trade volume in the current year.  For nearly half a century world trade growth has been outpacing world GDP growth EVERY YEAR.  Preliminary (to be revised) data of the last quarter certainly do not justify wild claims of world trade "collapse". 

Chicken Little did indeed claim that the sky was falling, but he/she did it in children's fairy tales.

@ KO

I agree with you that Minnesota Representative Bachmann is one of "America's finest" in this hour of folly.

The Democrats are confident that Mom and Dad's hard work will turn around the situation one way or the other, so they are seizing the opportunity to steal, steal, steal from the public trough to pay off their friends. Keep your eyes on leaders like Rep. Bachmann from Minnesota, who voted against every bailout from Day 1, including the Bush-Paulson bailout. A tax lawyer and a Christian: America's finest.

Surprise, surprise!
Just 2 years ago the whole western world was busy flipping condos for profit from Latvia to LA.Between greed and fear...so it goes.